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Profit Planning

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The Work of Management

Planning

Decision Organizing &


Evaluating Directing
Making

Controlling

2
The Work of Management
Initiate LT &
Planning
ST Plans

Evaluate Decision Organizing


Implement&
Evaluating
Performance Directing
Plans
Making

Measure
Controlling
Performance

3
The Work of Management
Initiate LT &
Planning
Planning
ST Plans

Planning -- involves
Evaluate
developing objectives
Decision Organizing
Implement&
Evaluating
Performance Directing
Plans
Making
and preparing various
budgets to achieve these
objectives.
Measure
Controlling
Performance

4
The Work of Management
Control
Initiate LT & involves the
Planning
steps
ST Planstaken by
management that
attempt to ensure the
Evaluate Organizing
Implement&
Evaluating
Performance objectives
Decision
Making
are Directing
attained.
Plans

Measure
Controlling
Control Performance

5
The Work of Management
Initiate LT &
ST Plans

Evaluate Decision Implement


Performance
Budgets Making Plans

Measure
Performance

6
The Work of Management
Through
Planning
the budget

Evaluate Decision Implement


Performance Making Plans

Measure
Performance

7
The Work of Management

Planning

According
Evaluate Decision Implement
to the Budget
Performance Making Plans

Measure
Performance

8
The Work of Management
Initiate LT &
Planning
ST Plans

Evaluate Decision Organizing


Implement&
Evaluating
Performance Directing
Plans
Making

Measure
Controlling
Performance

9
The Basic Framework
of Budgeting

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A Budget is . . .

A quantitative expression of a plan of


action.
A detailed plan for acquiring and
using financial and other resources
over a specified time period (text).

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Now

1 Year

5 Years
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Short-Run Vs. Long-Run
Budgets

Strategic Planning
Selecting overall objectives.
Choosing what markets to be in.
Selecting what products to produce.
Determining the price/quality mix.
Deciding which technologies to use.

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Short-Run Vs. Long-Run
Budgets
Strategic Planning

Long-run Budgets (more than one year)


Forecasts of large asset acquisitions.
Financing plans.
Research and development plans.

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Short-Run Vs. Long-Run
Budgets
Strategic Planning

Long-run Budgets

Short-run Budgets (1 year or less)


Quantities to produce.
Quantities to sell.
Supplies acquisitions.

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Budgets . . .
Imposed

Vs.

Participatory
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Imposed Budgets Versus
Participatory Budgets

Imposed Participatory
Budgets Budgets

Continuum
Participatory Budgets

Right to comment Ultimate right


before implementation to set budgets

Continuum

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Imposed Budgets Versus
Participatory Budgets

Imposed
Budgets

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Best Time to Use . . .

In start-up organizations
In extremely small businesses
In times of economic crises
When operating managers
lack budgetary skills or perspective.

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Advantages . . .

Requires less time.


Utilize top managements knowledge
of overall resource availability.
Increase probability that the firms
strategic plans are incorporated.

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Disadvantages . . .

Reduce feeling of teamwork.


Dissatisfaction and low morale.
Limited acceptance of stated goals
and objectives.
May stifle initiative of lower level
managers.
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Imposed Budgets Versus
Participatory Budgets

Participatory
Budgets

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Best Time to Use . . .

In well-established organizations.
In extremely large businesses.
In times of economic affluence.
When operating managers have
strong budgetary skills
and perspectives.
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Advantages . . .

Obtain information from those


persons most familiar with the needs
and constraints of the organizational
units.
Leads to better morale and higher
motivation.

25
Advantages . . .

Integrates knowledge that is diffused


among various levels of
management.
Provides a means to develop fiscal
responsibility and budgetary skills of
employees.

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Advantages . . .

Develop a high degree of acceptance


of and commitment to organizational
goals and objectives by operating
management.
Are generally more realistic.

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Disadvantages . . .

Require significantly more time.


May motivate managers to introduce
slack into the budget.
May support empire building by
subordinates.

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Advantages of Budgeting

Define goal
and objectives
Communicating Think about and
plans plan for the future

Advantages
Coordinate Means of allocating
activities resources

Uncover potential
bottlenecks

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The
Master Budget

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The Master Budget

Sales Budget Sales Forecast

Production S&A Exp


EI Budget
Budget Budget

Overhead
DM Budget DL Budget
Budget

Cash Budget Capital Budget

Pro Forma Inc. Pro Forma Bal.


Pro Forma SCF
Stmt Sht 32
The
Master Budget

The Text Example


Hampton Freeze

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Tom Willis is the majority stockholder
and chief executive officer of Hampton
Freeze, Inc., a company he started in
2001. The company makes premium
popsicles using only natural
ingredients and featuring exotic flavors
such as tangy tangerine and minty
mango. The companys business is
highly seasonal, with most of the sales
occurring in spring and summer.
34
In 2002, the companys second year
of operations, a major cash crunch
in the first and second quarters
almost forced the company into
bankruptcy. In spite of this cash
crunch, 2002 turned out to be
overall a very successful year in
terms of both cash flow and net
income.
35
With the full backing of Tom Wills,
Larry Giano set out to create a
master budget for the company for
the year 2003.
In his planning for the budgeting
process, Larry drew up the
following list of documents that
would be a part of the master
budget.
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1

6 2 7

3 4 5

9 10

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The Sales
Budget

A budget showing the


number of units, sales
price and total sales for
each quarter (or month).
38
Research into the history of cash
collections at Hampton Freeze
indicated that
70% of sales are collected in the
quarter in which the sale is made and
the remaining 30% are collected in
the following quarter.

39
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The Production
Budget

A budget showing the


number of units that must be
produced during each
budget period to meet sales
needs and to provide for the
desired ending inventory.
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Finished Desired EI
Expected BI of
Units of
to be
= Sales in + Finished - Finished
Units Units
Produced Units

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Hampton Freeze would like the ending
inventory of finished goods to be equal
to 20% of next quarters sales.

The company has 2,000 units of


beginning inventory.

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2. Equals expected 3. Plus Desired EI of
sales in units finished units.

4. Less BI of finished 1. Finished units to be


units. produced 44
Desired Ending
Inventory of Finished
Goods equals 20% of
next quarters sales.

Ending Inventory for one quarter equals


Beginning Inventory for next quarter. 45
Notice how inventories are accounted for on
the spreadsheet.

46
The Direct Materials
Purchases Budget

A budget showing the raw


materials that must be
purchased to fulfill the
production budget and to
provide for adequate
inventories.
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Required Amount Desired EI
Purchases Required + of Raw BI of Raw
of Raw
= - Materials
for Materials
Materials Production

48
Hampton Freeze has
established a policy of
maintaining RM equal to 10% of the
amount required for production in
the subsequent quarter.

In the first quarter the company


plans on producing 14,000 units
(from the production budget)

Each unit requires parts costing


$0.20. 49
To prepare the Schedule of
Expected Cash Disbursements for
Materials, Hamptons policy is to
Pay for 50% of purchases in the
quarter in which the purchase is
made, and

Pay the remaining 50% in the


following quarter.

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2. Equals amount 3. Plus Desired EI of
required for raw materials.
production.

4. Less BI of raw
materials.

1. Required purchases of
Direct Materials

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The Direct
Labor Budget

A budget showing the direct


labor hours (and total
amount) needed to produce
the number of units specified
in the production budget.

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Each case produced requires 0.4 direct
labor hour.
Each hour costs $15

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The Direct Labor Budget

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The MOH
Budget

A budget showing all


costs of production other
than direct materials and
direct labor.
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The MOH Budget

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The Ending Finished
Goods Inventory
Budget

A budget showing the


carrying cost of the unsold
units remaining in inventory.
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The Ending FG Inventory Budget

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The Selling and
Administrative
Expense Budget

A budget showing
expenses for areas other
than manufacturing.
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The S&A Expense Budget

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The Cash
Budget

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The Budgeted
(Pro-Forma)
Income
Statement

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The Budgeted
Balance Sheet

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class discussion:
explain about
behavioral aspects
of accounting

68

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